Abstract
The second chapter has systematically analyzed the corporate governance framework of state-controlled listed companies which have constituted the overwhelming majority of all listed companies in China, either from the aspect of their total number and capitalization or their substantial influences on the formation and change of law and other institutions. These efforts have provided the necessary institutional background for the following exploration on how the corporate governance of state-controlled listed companies which is termed the control-based model by company law academics1 has hampered the healthy development and prosperity of Chinese domestic VCs. As it was mentioned in the first chapter, the examination of the negative impacts caused by the control-based model on Chinese domestic VCs would be conducted with the mirror of the successful template of American VCs which has been proved to be duplicable by other countries.2 On the basis of the abundant intellectual products about the institutional environment to guarantee an active VC market in the USA made by western legal and financial scholars, four indispensable elements have been isolated: the availability of large and independent funding, the application of organizational and contractual incentive mechanisms, the existence of efficient exit channels and the high-risk tolerance level of venture capitalists. This chapter aims to discuss how the control-based model has restrained the presence or the full functioning of the first institutional element in China. In other words, it is an attempt to establish the linkage between the control-based model and the difficulty of raising large and independent funds suffered by Chinese domestic VCs. This chapter comprises three sections. The first section briefly describes the successful operation of American VCs in the aspect of raising large and independent funds. With the American practice as the mirror, the second section analyzes how the control-based model has hindered the availability of large and independent funds for Chinese domestic VCs. The final section is a concluding remark.
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Notes
- 1.
See Liu “Corporate Governance in China: Current Practices” (footnote 6, Chapter 1), p 415.
- 2.
See footnote 38, pp 1068–1103, Chapter 1.
- 3.
Gompers P, Lerner J (2004) The venture capital cycle, 2nd edn. MIT, Cambridge, MA, pp 6–7.
- 4.
Bartlett RP (2006) Venture capital, agency costs, and the false dichotomy of the corporation. UCLA Law Rev 54:53.
- 5.
Gompers PA, Lerner J, Blair MM, Hellmann T (1998) What drives venture capital fundraising? Brookings Papers on Economic Activity-Microeconomics 149.
- 6.
Gompers P, Lerner J (2001) The venture capital revolution. J Econ Perspect 15:146. In addition, “institutional investors” hereinbefore solely refer to non-financial institutions. At that time, financial institutions in America were not precluded from investing in VC firms, but few of them showed interest in this sector due to strong risk-aversion.
- 7.
Ibid.
- 8.
Ibid.
- 9.
See footnote 33, p 881, Chapter 1.
- 10.
See Gompers P, Lerner J (1996) The use of covenants: an empirical analysis of venture partnership agreement. J Law Econ 39:463; Gompers P, Lerner J (1999) An analysis of compensation in the U.S. venture capital partnership. J Financ Econ 51:3; Poterba JM (1987) How burdensome are capital gains taxes? Evidence from the United States. J Public Econ 33:157–172.
- 11.
Gompers P, Lerner J (1994) Venture capitalists and the decision to go public. J Financ Econ 35:293–295.
- 12.
See footnote 6 above.
- 13.
See footnote 11 above.
- 14.
See footnote 5 above.
- 15.
See footnote 33, p 880, Chapter 1.
- 16.
Ibid., p 881.
- 17.
Ivanov VI, Masulis RW (2008) Corporate venture capital, strategic alliances, and the governance of newly public firms. http://cei.ier.hit-u.ac.jp/Japanese/database/documents/WP2008-15.pdf. Accessed 11 Dec 2008.
- 18.
Lutsi JD (1995) Pensions turn to long-haul venture capital funds to raise returns. Corp Cashflow 16:36.
- 19.
See footnote 33, pp 880–881, Chapter 1.
- 20.
Sibbitt EC (1998) Law, venture capital, and entrepreneurism in Japan: a microeconomic perspective on the impact of law on the generation and financing of venture businesses. Conn J Int Law 13:85–105.
- 21.
In China, the fundraising and exit of foreign VCs are usually carried out abroad. This model is called “two-end-outside” by Chinese venture capitalists. Recently, some commentators have argued that this model may be substantially changed by the ongoing financial crisis. However, as Nanpeng Shen, CEO of Sequoia Capital (China), pointed out in the 11th China VC Forum in June 2009, the “two-end-outside” had not been significantly altered even if several RMB funds had been established by foreign VCs. In addition, Shen’s statement also implies that the latest financial tsunami does not cause many difficulties for American VCs to raise money in the USA, which has been confirmed by Song Jin, Vice-chairman of Gotham Capital Management. The speech of Shen is available at http://money.163.com/09/0605/14/5B25BPQK00253DMT.html. Accessed on 23 June 2009; Xinhuanet (2009) Wall Street Journal: hedge funds and private equity in the context of financial crisis. http://news.xinhuanet.com/fortune/2009-03/30/content_11099567.htm. Accessed 23 June 2009.
- 22.
ChinaReviewNews (2009) The environments for RMB funds are still immature. http://www.chinareviewnews.com/doc/1007/0/4/5/100704590.html?coluid=7&kindid=0&docid=100704590. Accessed 23 June 2009.
- 23.
See footnote 33, pp 892–894, Chapter 1.
- 24.
Professor Xianping Lang disapproves of purchasing stocks with pension funds because he thinks that Chinese enterprises considerably lack the fiduciary duty. However, most Chinese economists do not agree with him on this issue. As Professor Jinglian Wu said, Lang’s assumption was that China was in the worst period of her history, which was very irresponsible. See FinanceQQ (2009) Xianping lang disapproves of investing pension funds into stock markets. http://finance.qq.com/a/20041206/000070.htm. Accessed 24 June 2009; People’s Daily Online (2009) Eliminating sentimental debate on reform. http://finance.people.com.cn/BIG5/42774/4180763.html. Accessed 24 June 2009.
- 25.
Available at http://www.ssf.gov.cn/web/NewsInfo.asp?NewsId=42. Accessed 18 Dec 2008.
- 26.
Article 28 of the Provisional Regulation.
- 27.
People’s Daily Online (2008) The ICBC has become the trustee of social security funds. http://finance.people.com.cn/BIG5/5959441.html. Accessed 21 Dec 2008.
- 28.
Dai Y (2008) The reform policies for Chinese state-owned commercial banks and their dilemmas. http://www.chinareviewnews.com/crn-webapp/cbspub/secDetail.jsp?bookid=14781&secid=14813. Accessed 21 Dec 2008.
- 29.
People’s Daily Online (2008) The bank of communications has finished its preparation for the issuance of a shares within a short time and its IPO price will be above 10 yuan. http://finance.people.com.cn/GB/72020/74689/83016/5701297.html. Accessed 21 Dec 2008.
- 30.
Ibid. HSBC as the strategic investor holds 19.9% of the total shares of the Bank of Communications.
- 31.
The Bank of Communications (2008) An announcement on the transfer of shares. http://www.hkex.com.hk/csm/ShowNews.asp?mkt=hk&FileName=http://www.hkexnews.hk/listedco/listconews/SEHK/20080325/LTN20080325558_C.pdf. Accessed 21 Dec 2008.
- 32.
Xinhuanet (2008) The Guangdong branch of the ICBC has decided to loan RMB 30 billion to Guangdong Electric Power Development Company. http://big5.xinhuanet.com/gate/big5/gd.xinhuanet.com/newscenter/2008-09/05/content_14317974.htm. Accessed 23 Dec 2008.
- 33.
National Debt Association of China (2008) The investment projects of national debts. http://www.ndac.org.cn/specmemo.jsp?specid=investment. Accessed 26 Dec 2008.
- 34.
Xinhuanet (2008) Social security funds worth RMB50 billion yuan will be invested in private equity funds. http://big5.xinhuanet.com/gate/big5/news.xinhuanet.com/fortune/2008-05/07/content_8121071.htm. Accessed 31 Dec 2008.
- 35.
Xinhuanet (2009) Social security funds have been approved of investing in private equity funds. http://news.xinhuanet.com/fortune/2008-06/06/content_8320154.htm. Accessed 2 Jan 2009; Xinhuanet (2009) The SSF have decided to invest in two private equity funds respectively established by the CDH Investment and the Hony Capital. Available at http://big5.xinhuanet.com/gate/big5/news.xinhuanet.com/fortune/2008-06/11/content_8344332.htm. Accessed 2 Jan 2009. The Predecessor of the CDH Investment was the Private Equity Investment Department of China International Capital Corporation Limited (the CICC) affiliated with the China Investment Corporation; the Hony Capital is set up by Lenovo which was a state-owned enterprise.
- 36.
The respective investment portfolios of the CDH and the Hony Capital are available at http://www.cdhfund.com and http://www.honycapital.com. Accessed 2 Jan 2009.
- 37.
In the terminology, venture capital is a type of private equity which focuses on high-risk and high-return start-ups. In addition, the author believes that some may argue that it is only a matter of time for Chinese social security funds to massively enter the VC industry. The author agrees that time has the power to let something happen. However, for academic research, one cannot completely leave problems to time. The right approach is to identify the institutional barriers which hinder the prompt solution to problems. If this kind of effort can eventually speed up the process of institutional changes, the significance of academic research is well achieved. In this book, the author assumes that this institutional barrier is the control-based model.
- 38.
By the end of 2005, the total value of mutual funds in China was RMB469.116 billion yuan; by the end of 2007, the overall amount of premiums in China was over RMB700 billion yuan. These two items of data are, respectively, available at http://finance.sina.com.cn/fund/jjpl/20060106/18342255619.shtml, accessed 25 June 2009, and http://big5.southcn.com/gate/big5/insurance.southcn.com/hyyw/content/2008-12/08/content_4753310.htm, accessed 25 June 2009. Recently, several leading brokers in China have been allowed by the CSRC to make direct investment in corporations. The investment cap is set at 15% of their net capital. This may have some positive impacts on the fundraising of Chinese domestic VCs. However, taking into account the limited capital sizes of those brokers, the author does not think that this kind of impact will be substantial.
- 39.
By checking the ownership structures of leading mutual fund companies in China, it is discovered that most of them are state-controlled. Even if the statistics about the investment portfolios of their mutual funds cannot be obtained, there has reason to believe that they prefer stocks and bonds of state-controlled listed companies on the basis of the above fact.
- 40.
Although there are no statistics available concerning the distribution of loans between GVCs and private domestic VCs, with massive research using the Internet, the author has found that almost all the news on commercial banks’ participation in the VC sector regarded their lending deals with the GVC. For example, China Development Bank made a loan worth RMB100 million yuan to Xi’an Venture Capital Limited Company which is in the charge of Xi’an Municipal Government, available at http://www.chinavalue.net/Article/Archive/2008/4/7/108068.html. Accessed 4 Jan 2009.
- 41.
People’s Daily Online (2009) A new movement on VC in Tianjin Binhai new area. http://www.022net.com/2007/9-7/483342173097452.html. Accessed 4 Jan 2009.
- 42.
Li C (2008) An industry guidance fund worth RMB1 billion yuan founded by the Hangzhou Municipal Government. Hangzhou S&H Magazine 2:60.
- 43.
See footnote 48, Chapter 1.
- 44.
See footnote 48, p 5, Chapter 1.
- 45.
The 12th CPC Central Committee (2009) The decision to reform the science and technology system. http://cpc.people.com.cn/BIG5/64162/134902/8092254.html. Accessed 4 Jan 2009.
- 46.
Yigal E (2005) The successful experience of Israeli VC. Shenzhen Sci Technol 5:82–84.
- 47.
See footnote 38, pp 1100–1103, Chapter 1.
- 48.
Ibid.
- 49.
See footnote 48, p 5, Chapter 1.
- 50.
The State Council (2009) Notice on the approval of National High-tech Zones and its relevant policies. http://news.xinhuanet.com/ziliao/2005-02/17/content_2587962.htm. Accessed 5 Jan 2009.
- 51.
See footnote 48, p 6, Chapter 1.
- 52.
Ibid.
- 53.
For the sake of avoiding unnecessary trouble, the interviewee strictly forbade me to reveal both his name and his company’s name.
- 54.
Southcn (2009) What have we learnt from the failure of the China new technology venture investment corporation? http://www.southcn.com/tech/special/fxtz/case/200403150917.htm. Accessed 27 June 2009.
- 55.
In addition to spoiling the climate of domestic VCs, GVCs also have a squeeze-out effect on private domestic VCs. By contrast, foreign VCs have obtained many preferential policies and opportunities from governments. This difference is mainly ascribed to the standard used by Chinese authorities to judge political achievements. See Xinhuanet (2009) The development of private enterprises should have the priority over foreign ones. http://news.xinhuanet.com/comments/2007-01/29/content_5657623.htm. Accessed 27 June 2009.
- 56.
Actually, in Chinese private domestic VCs which are the minority compared with GVCs, venture capitalists also lack independence. As it is illustrated in the fourth chapter, it is also attributed to the control-based model to some extent.
- 57.
Wang Y (2007) A new model for government’s involvement into VC. China Electron Market 3:76.
- 58.
Ibid.
- 59.
Ibid.
- 60.
Available at http://www.vimicro.com.cn/milestone3.htm. Accessed 5 Jan 2009.
- 61.
The National Development and Reform Commission and the Ministry of Finance (2009) The provisional regulation on the industry guidance funds under the management of VCs. http://gjss.ndrc.gov.cn/xgfj/t20080523_212913.htm. Accessed 5 Jan 2009.
- 62.
Article 2 of “The Provisional Regulation on the Industry Guidance Funds under the Management of VCs”.
- 63.
Yu N, Qiao X (2009) A new wave of domestic private equity. http://www.caijing.com.cn/2007-11-14/100037821.html. Accessed 5 Jan 2009.
- 64.
The National Development and Reform Commission, the Ministry of Finance and the Ministry of Commerce (2009) The guideline on the establishment and operation of the industry guidance funds. http://www.gov.cn/zwgk/2008-10/22/content_1127977.htm. Accessed 5 Jan 2009.
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Zhang, L. (2012). The Difficulty of Fundraising Suffered by Chinese Domestic VCs. In: Venture Capital and the Corporate Governance of Chinese Listed Companies. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-1281-6_3
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